If you’re reading this article:
• You’re on a rewarding journey towards financial freedom and control
• You’re aware of the incredible opportunity available to self-directed investors through a Self-Directed IRA (SDIRA), Solo 401k or Qualified Retirement Plan (QRP)
• You may be aware of Self-Directed IRA accounts that are worth $100,000,000+ (No, that’s not a typo.)
• You’re excited by the infinite asset options that are accessible to a truly self-directed retirement account: real estate, precious metals, hard-money loans, start-ups, gold & silver, cryptocurrency, tax liens, merchant cash advance, private companies, promissory notes & mortgages, livestock, crowdfunded investments, private lending, and so much more!
Ask yourself, “Am I prepared for this journey? Do I have all that I need to make the most of all this incredible opportunity?”
With Wall Street investments, you’re a supporting character to the main actors – the financial institutions and financial brokers that create pre-packaged assets to sell.
With a self-directed IRA and QRP, YOU ARE THE MAIN CHARACTER… but, where’s your supporting cast?!
Why does your SDIRA have a custodian or trustee? Because the section of the tax code that creates IRAs and their tax benefits says it must. An IRA is only an IRA if its assets are custodied or trusteed by a financial institution. (If you’re so inclined, you can find all the details in §408 of the Tax Code and 26 CFR § 1.408-2.)
An SDIRA custodian has nothing to “sell” you and generates no revenue from your investment choices. An SDIRA custodian aims to be classified as a passive trustee under both IRS, securities, and banking regulations. Therefore, an SDIRA custodian does its utmost to avoid giving anything that can be construed as advice regarding your SDIRA and QRP investments. The role of the SDIRA custodian is strictly passive.
An SDIRA custodian does, among others:
• take title to SDIRA assets, as required by tax law and the IRS
• track SDIRA contributions, distributions, and rollovers
• report to the IRS and SDIRA investor annually on Form 5498
• report distributions to the IRS and SDIRA investor on Form 1099-R
• provide basic SDIRA & QRP education
But, an SDIRA and QRP does require extensive guidance to avoid common tax pitfalls and maximize investor returns! The control and freedom of self-directed accounts is accompanied by greater compliance responsibility on the part of the SDIRA investor. Opportunity and responsibility always go hand-in-hand.
Following are some topics that you should address with an SDIRA CPA:
• What type of account will be best for my tax profile and investment strategy?
• Traditional IRA
• Roth IRA
• QRP or Individual 401(k)
• Will my SDIRA or QRP have to pay taxes? (Yes, tax-sheltered retirement accounts may have to pay taxes.)
• Unrelated Business Taxable Income – UBTI
• Unrelated Debt Financed Income – UDFI
• Tax strategies to eliminate or mitigate UBIT and UDFI, if applicable
• Understand the real implications of UBIT, UBTI, and UDFI. SDIRA & QRP investors that are familiar with UBIT may be intimidated by it and the incredible amount of internet misinformation about the topic.
• What types of investments are best suited to a tax-sheltered SDIRA or QRP? What type of investments are better suited to a taxable account?
• What are prohibited transactions and how can they be navigated?
• All SDIRA and QRP investors are (hopefully) aware of the basics of the prohibited transaction rules
• An SDIRA custodian will have procedures in place to flag obvious prohibited transactions
• However, there are many potential prohibited transactions that can’t be flagged by an SDIRA custodian questionnaire
Self-directed retirement accounts are empowering and can be life-changing for you. Properly harnessing these tax tools requires that we respect their rules and navigate them strategically.
Self-directed accounts are for you if you're interested in taking control of your finances to invest on your own terms. You must be aware of the rules, and when properly understood they are (almost) never an obstacle to using an SDIRA, Solo 401(k) or QRP.
With the proper supporting cast in place, you - the main actor – are now ready for showtime.
About the Author
Bernard Reisz CPA is the founder of ReSure LLC (“ReSure Financial”), which provides specialized tax and financial solutions through multiple websites. 401kCheckbook.com provides investors nationwide with direct control of tax-sheltered funds for self-directed investing opportunities using IRA-Owned LLCs & Trusts and QRP/401k-Owned LLC.
AgentFinancial.com, also operated by ReSure, provides tax strategy, entity and financial services to real estate professionals, including real estate agents, real estate investors, and mortgage brokers.
Bernard has appeared on numerous leading financial shows to provide in-depth insight on a broad array of tax and financial subjects, some of which are accessible by clicking here.
*Mainstar's role as custodian of self-directed accounts is nondiscretionary and/or administrative in nature. This information is for educational purposes only, and should not be construed as investment, legal, tax or financial advice or as a guarantee, endorsement, or certification of any investments. Mainstar encourages individuals to consult a financial or legal professional when making investment decisions.